Investors Will Soon Face "Junk Debt" Risk
It's a term that we've come to dread: "junk bonds." While we may have thought that they would never rear their ugly head again, bonds did not stop existing after the financial crisis. According to a report from Moody's Investor Service that was cited by the Wall Street Journal in recent days, more than $1.0 trillion (that's $1,000,000,000,000) worth of junk debt (bonds) is scheduled to mature over the next five years, and this could provide businesses that are very debt-heavy with quite a few serious challenges. Companies with low credit ratings can obtain funding at favorable rates for the moment, but the situation could turn ugly if yields on junk debt decides to surge.
The $1.063 trillion in junk debt is the largest sum the credit ratings agency has ever recorded for such a period (within the next 5 years). The vast majority of this debt ($933 billion worth) is scheduled to actually mature after 2019 according to Bloomberg, but in the near term the junk debt market could face liquidity issues if there is not enough demand to for the bonds that companies want to issue.
At the moment, businesses can issue junk-grade debt fairly easy, with yields on average about 5.72%. This is actually the lowest average yield since September 2014. The market was worried about moving into another recession and only a year before yields surged about 10%.
So what does this all mean? Well, if market conditions fail it could mean that certain industries could prove quite vulnerable. The energy sector makes up about 15% of the high-yield bond markets and this could be a sector that is likely to fold. However, technology, media, metals, mining, retail, automotive and telecom companies can also be vulnerable, mostly due to high production costs and the need for companies to take on/issue debt in order to fund these practices.
Jamie Johnson, CEO of investment manager Fjp Investment Ltd., noted that in regard to these debt levels "companies are beginning to address their maturities, and I am somewhat concerned as to how this is likely to play out, since we are dealing with unprecedented levels of junk debt. Companies are already dealing with extremely high levels of debt, and the market is going to struggle when it comes to absorbing so much risky debt."
Ultimately, this is just one more little piece to consider among all other items impacting the market. The stock market is a puzzle, and you need many pieces together to see the picture that's emerging. This is just one piece for you.
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